Selected Abstracts

DO MARKETS PENALIZE AGENCY CONFLICTS BETWEEN CONTROLLING AND MINORITY SHAREHOLDERS?

THE DEVELOPING ECONOMIES, Issue 3 2007EVIDENCE FROM CHILE
G32;
G34;
O16
Using a sample of Chilean listed firms with widespread presence of economic conglomerates that use pyramid structures to control affiliated companies, we find that firms where controlling shareholders have higher coincidence between cash and control rights are persistently more valued by the market.
We carefully check that our results are not driven by omitted variable biases and control for reverse causation using a feature of Chilean Corporations Law that provides an exogenous instrument for ownership concentration.
[source]

THE JOURNAL OF FINANCIAL RESEARCH, Issue 4 2007Stephen P. Ferris
Abstract
Namesake funds provide a unique sample for studying the two agency conflicts that exist within a mutual fund.
The first is between the fund management company and fund shareholders, and the second is between the fund management company and the fund manager.
A typical namesake fund manager sits on his or her fund's board, frequently as the chairman, is the majority owner of the fund management company, and has significant investments in the fund he or she manages.
Our results indicate that namesake funds charge higher fees, suggesting that the boards of namesake funds are less effective.
We find that namesake funds are more tax efficient, consistent with the idea that managerial ownership helps align the interests of managers with those of shareholders.
Because of fewer career concerns, namesake fund managers herd less while assuming greater unsystematic risk.
We find weak evidence that namesake fund managers outperform their benchmarks and peers.
Finally, we observe that namesake funds attract higher levels of investor cash flow.
[source]

Agency conflicts between board and manager

NONPROFIT MANAGEMENT & LEADERSHIP, Issue 2 2009A discrete choice experiment in Flemish nonprofit schools
Detecting agency problems is an important task when assessing the effectiveness of a nonprofit organization's governance.
A first step is to examine the objectives of principals and agents and determine whether there is a systematic difference between them.
Using a discrete choice experiment, we identify the objectives of board chairpersons (principals) and headmasters (agents) of Flemish nonprofit schools.
We find systematic differences between the two groups.
Of the seven possible objectives set out in the experiment, six are relevant for both headmasters and board chairpersons.
For four of these, the preferences of both groups differ significantly.
Whereas ideological values play an important role for both the board and the headmaster, they are significantly more important for the board.
Both parties dislike having a large number of pupils, and the disutility is larger for the board.
With respect to job satisfaction and pupil satisfaction, we find the opposite: while the board is prepared to give up pupil and job satisfaction in favor of the other objectives, these two objectives score very high on the priority list of the headmasters.
[source]

CORPORATE GOVERNANCE, Issue 1 2010En-Te Chen
ABSTRACT
Manuscript Type: Empirical
Research Question/Issue: We propose that high levels of monitoring are not always in the best interests of minority shareholders.
In family-owned companies the optimal level of board monitoring required by minority shareholders is expected to be lower than that of other companies.
This is because the relative benefits and costs of monitoring are different in family-owned companies.
Research Findings/Insights: At moderate levels of board monitoring, we find concave relationships between board monitoring variables and firm performance for family-owned companies but not for other companies.
The optimal level of board monitoring for our sample of Asian family-owned companies equates to board independence of 38 per cent, separation of the chairman and CEO positions, and establishment of audit and remuneration committees.
Additional testing shows that the optimal level of board monitoring is sensitive to the magnitude of the agency conflict between the family group and minority shareholders and the presence of substitute monitoring.
Theoretical/Academic Implications: This study shows that the effect of additional monitoring on agency costs and firm performance differs across firms with different ownership structures.
Practitioner/Policy Implications: For policymakers, the results show that more monitoring is not always in the best interests of minority shareholders.
Therefore, it may be inappropriate for regulators to advise all companies to follow the same set of corporate governance guidelines.
However, our results also indicate that the board governance practices of family-owned companies are still well below the identified optimal levels.
[source]

Ownership Concentration in Privatized Firms: The Role of Disclosure Standards, Auditor Choice, and Auditing Infrastructure

JOURNAL OF ACCOUNTING RESEARCH, Issue 5 2006OMRANE GUEDHAMI
ABSTRACT
We rely on a unique data set to estimate the impact of disclosure standards and auditor-related characteristics on ownership concentration in 190 privatized firms from 31 countries.
Accounting transparency can help alleviate the agency conflict between minority investors and controlling shareholders, which is evident in the extent of ownership concentration, since the expropriation of corporate resources hinges on these private benefits remaining hidden.
After controlling for other country-level and firm-level determinants, we find weak (no) evidence that extensive disclosure standards (auditor choice) reduce ownership concentration.
In contrast, we report strong, robust evidence that ownership concentration is lower in countries with securities laws that specify a lower burden of proof in civil and criminal litigation against auditors, consistent with Ball's [2001] predictions.
Collectively, our research implies that minority investors worldwide value legal institutions that discipline auditors in the event of financial reporting failure over both the presence of a Big 5 auditor and better disclosure standards.
Re-estimating our regressions on a broad sample of western European public firms provides similar evidence on all of our predictions.
[source]

Who Cares about Auditor Reputation?,

CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2005JAN BARTON
Abstract
I provide evidence on the demand for auditor reputation by examining the defections of Arthur Andersen LLP's clients following the accounting scandals and criminal conviction marring the auditor's reputation in 2002.
About 95 percent of clients in my sample did not switch auditors until after Andersen was indicted for criminal misconduct regarding its failed audit of Enron Corp.
I test whether the timing of client defections and the choice of a new auditor are consistent with managers' incentives to mitigate potentially costly information and agency problems.
I find that clients defected sooner, mostly to another Big 5 auditor, if they were more visible in the capital markets; such clients attracted more analysts and press coverage, had larger institutional ownership and share turnover, and raised more cash in recent security issues.
However, my proxies for agency conflicts , managerial ownership and financial leverage , are not associated with the timing of defections or the choice of new auditor.
Overall, my study suggests that firms more visible in the capital markets tend to be more concerned about engaging highly reputable auditors, consistent with such firms trying to build and preserve their own reputations for credible financial reporting.
[source]

Is CEO Duality Always Negative?

CORPORATE GOVERNANCE, Issue 2 2009An Exploration of CEO Duality, Ownership Structure in the Arab IPO Context
ABSTRACT
Manuscript type: Empirical
Research Question/Issue: This paper examines the relationships between initial public offering (IPO) underpricing, CEO duality, and strategic ownership in 12 Arab countries of the Middle East and North Africa (MENA) region.
Research Findings/Results: Using all IPOs from January 2000 until the end of July 2007, we document an average IPO underpricing of 184.1 per cent. Underpricing is higher in IPO firms that have CEO duality.
However, strategic shareholders, such as corporations and other industry-related investors, are likely to play a monitoring role whereas underpricing is found to be lower in firms with both CEO duality and strategic shareholder ownership.
Moreover, the negative relation between underpricing and strategic blockholding is greater for foreign strategic ownership than it is for domestic strategic ownership.
Theoretical Implications: This paper examines the level and determinants of IPO underpricing in the MENA region.
It provides evidence on the role played by foreign strategic owners in reducing agency conflicts and information asymmetries within an environment where firms may be affected by the cultural issues related to political ties and family involvement.
Practical Implications: Our results contribute to the existing debate on the appropriate regulations for an effective and stable financial system in Arab countries.
They offer policy-makers additional evidence on the positive impact of market openness to foreign shareholders.
[source]

Do External Auditors Perform a Corporate Governance Role in Emerging Markets?

JOURNAL OF ACCOUNTING RESEARCH, Issue 1 2005Evidence from East Asia
ABSTRACT
In emerging markets, the agency conflicts between controlling owners and the minority shareholders are difficult to mitigate through conventional corporate control mechanisms such as boards of directors and takeovers.
We examine whether external independent auditors are employed as monitors or as bonding mechanisms, or both, to alleviate the agency problems.
Using a broad sample from eight East Asian economies, we document that firms with agency problems embedded in the ownership structures are more likely to employ Big 5 auditors.
This relation is evident among firms that raise equity capital frequently.
Consistently, firms hiring Big 5 auditors receive smaller share price discounts associated with the agency conflicts.
Also, we find that Big 5 auditors take into consideration their clients' agency problems when making audit fee and audit report decisions.
Taken together, these results suggest that Big 5 auditors do have a corporate governance role in emerging markets.
[source]

Effects of Concentrated Ownership and Owner Management on Small Business Debt Financing,

JOURNAL OF SMALL BUSINESS MANAGEMENT, Issue 4 2007Zhenyu Wu
Using unique data and a new powerful Monte Carlo-based statistical tool, we examine the effects of concentrated ownership and owner,management (CO-OM) on the creditor,shareholder agency conflicts in small firms.
A significant CO-OM effect from the small business owner's view, but insignificant from the commercial lenders' perspective, is found.
Special features of informational asymmetry problems in small firms with CO-OM are also highlighted.
Theoretical and empirical contributions are made to the small business management and corporate governance literature.
Findings obtained from this research have important implications for small business practitioners as well as researchers, and this study can serve as a reference for policymakers and institutional lenders to assist small firms in successfully raising money through debt financing.
In addition, a new powerful methodology is introduced to deal with various potential statistical biases and can be further applied to this line of research.
[source]

THE JOURNAL OF FINANCE, Issue 4 2007JEFFREY R. BROWN
ABSTRACT
We test whether executive stock ownership affects firm payouts using the 2003 dividend tax cut to identify an exogenous change in the after-tax value of dividends.
We find that executives with higher ownership were more likely to increase dividends after the tax cut in 2003, whereas no relation is found in periods when the dividend tax rate was higher.
Relative to previous years, firms that initiated dividends in 2003 were more likely to reduce repurchases.
The stock price reaction to the tax cut suggests that the substitution of dividends for repurchases may have been anticipated, consistent with agency conflicts.
[source]

THE JOURNAL OF FINANCIAL RESEARCH, Issue 4 2007Stephen P. Ferris
Abstract
Namesake funds provide a unique sample for studying the two agency conflicts that exist within a mutual fund.
The first is between the fund management company and fund shareholders, and the second is between the fund management company and the fund manager.
A typical namesake fund manager sits on his or her fund's board, frequently as the chairman, is the majority owner of the fund management company, and has significant investments in the fund he or she manages.
Our results indicate that namesake funds charge higher fees, suggesting that the boards of namesake funds are less effective.
We find that namesake funds are more tax efficient, consistent with the idea that managerial ownership helps align the interests of managers with those of shareholders.
Because of fewer career concerns, namesake fund managers herd less while assuming greater unsystematic risk.
We find weak evidence that namesake fund managers outperform their benchmarks and peers.
Finally, we observe that namesake funds attract higher levels of investor cash flow.
[source]

CAPITAL STRUCTURE, SHAREHOLDER RIGHTS, AND CORPORATE GOVERNANCE

THE JOURNAL OF FINANCIAL RESEARCH, Issue 1 2007Pornsit Jiraporn
Abstract
We show how capital structure is influenced by the strength of shareholder rights.
Our empirical evidence shows an inverse relation between leverage and shareholder rights, suggesting that firms adopt higher debt ratios where shareholder rights are more restricted.
This is consistent with agency theory, which predicts that leverage helps alleviate agency problems.
This negative relation, however, is not found in regulated firms (i.e., utilities).
We contend that this is because regulation already helps alleviate agency conflicts and, hence, mitigates the role of leverage in controlling agency costs.
[source]

Risk Measurement and Investment Myopia in Hedge Fund Management,

ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, Issue 1 2009Xun Li
Abstract
Lo (2001) surveys the literature on risk management for hedge funds, and recommends a dynamic and transparent risk measurement for the evolutionary hedge fund industry by citing Albert Einstein's comments.
This study is to explore the feasibility and advantages of adopting a dynamic absolute-deviation risk measurement in hedge fund management.
It does not only provide an optimal asset allocation strategy both analytically and numerically in a dynamic mean-absolute deviation (DMAD) setting for hedge fund managers, but also contributes to mitigation of potential investment myopia problems in their risk-taking behaviors.
It sheds light on risk management and investor-fund manager agency conflicts in the hedge fund industry and adds to the literature on portfolio selection and optimal asset allocation.
[source]